Know Pros and Cons Before Securing a Payday Loan

Q: What is a payday loan?
A: A payday loan is a small personal loan, usually around $500, which is based on your income and requires evidence of a job (paystub). A postdated check and checking account statements showing the account is active are generally required for the loan, but even without a checking account, you may be able to get a loan. The payback date is usually based on when you are paid, so it may be one week, two weeks, or one month from the date of the loan.

Q: Who provides payday loans?
A: Payday lenders are for-profit businesses found in many neighborhoods. They also can be found on the Internet. Caution should be used when dealing with any payday lender. Payday lenders are in business to make money for their owners and/or shareholders (as opposed to nonprofit organizations, which operate under a mission to benefit the “greater good” and cannot use their funds for anything else).   

Q: What are the advantages of getting a payday loan?
A: A payday loan can get you cash quickly for emergencies or unexpected expenses, usually without the credit checks required for other types of loans. Generally, you must provide a postdated check and some verification of income, as well as a phone bill in your name.

Q: What are some disadvantages?
A: Payday loans carry very high interest rates usually more than 300 percent and fees. By comparison, a credit card may typically carry 24 percent interest. For example, you might borrow $200 on February 1, and write a $225 check postdated for February 15. This may not seem like a lot to pay, but the interest rate you are paying is very high for two weeks’ worth of borrowing. If you cannot make good on the postdated check, then the loan might be rolled over, which means you will be paying interest on the original amount (including interest), that you owed.

Also, if you use a postdated check to secure a loan, you may incur an additional “NSF bank” (non-sufficient funds) charge (usually $35) if there is not enough money in your checking account to cover your check on the loan’s due date. Payday lenders can submit postdated checks more than once over several days, generating multiple NSF fees that can increase your overall cost.

Finally, payday lenders’ collection actions are typically more aggressive than a typical bank or credit card issuer. If you cannot pay, you will be subject to aggressive collection calls and other activities almost immediately upon your failure to pay.

Q: Can I pay off a payday loan in installments?
A: Generally, no. These loans are designed to be paid back in a single payment. However, some lenders may be willing to set up installment plans.

Q: What happens if my payday loan is rolled over and I still can’t pay it off?
A: The loan will remain an outstanding debt, which means that the payday lender can sue you in court to get the money you owe. It is not wise to roll over your loan, since it increases the amount of money you owe through additional interest and fees, and makes it more difficult to pay off.

Q: If I’m willing to keep adding interest to my loan, how long will it be before I have to pay it off completely?
A: You can usually roll over a payday loan four times, which would give you approximately two to three months to pay off the loan.
Q: If I decide that a payday loan costs too much in interest and fees, or is too risky, what are my alternatives when I need money on an immediate, short-term basis?
A: For a less costly alternative, try getting a loan from a bank, a credit union, a finance company, a friend or relative, or asking for an advance from your employer. You might also consider using a pawn shop. Some people use auto title loans as an alternative, but the interest rate for an auto title loan can be high, and you would give your vehicle as collateral for the loan (which means that you could lose your car if you don’t pay off your loan).

To get help so that you can avoid this type of problem in the future, you may want to consider getting financial counseling from a nonprofit credit counseling service, that is a member of the National Foundation for Consumer Credit (NFCC). 

Q: I took out a payday loan. The lender said it would be a criminal offense if I didn’t have sufficient funds in my account on the due date. Is that true?
A: Because your check was postdated, the lender is on notice that you do not have sufficient funds on the date you gave the lender your check. You would not be committing a criminal offense unless you gave the lender a check knowing you would not have sufficient funds to cover it on the due date and you clearly intended to defraud the lender. 

11/15/2016

This “Law You Can Use” column was provided by the Ohio State Bar Association. It was originally prepared by Akron attorney Terry Zimmerman, and Richard Korn, financial and consumer credit counselor at W.A.R.M. (Westerville Area Resource Ministry). It was updated by Richard Korn and Canton attorney Anthony J. DeGirolamo.

Articles appearing in this column are intended to provide broad, general information about the law. This article is not intended to be legal advice. Before applying this information to a specific legal problem, readers are urged to seek advice from a licensed attorney.

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